June 7, 2015 / 9:01 PM / 5 years ago

UPDATE 1-Turkey's lira hits record low after election jolt for ruling AKP

(Adds comment from market analysts and investors; updates prices)

By David Dolan

ISTANBUL, June 7 (Reuters) - The Turkish lira hit a record low in weekend-thinned trade on Sunday, after the governing AK Party failed to win an outright majority in a parliamentary election, unsettling investors with the prospect of a minority or coalition government.

Investors had been hoping the AKP would squeak out enough votes to remain in power as a single party and avoid the uncertainty and gridlock of coalition politics.

But with more than 96 percent of ballots counted, the AKP had taken 40.9 percent of the vote, according to broadcaster CNN Turk, a result likely to leave it struggling to form a stable government for the first time since it came to power more than a decade ago.

“The loss of the AKP’s 13-year-long single-party parliamentary majority in today’s Turkish election represents one of the most dramatic political developments in emerging markets in recent years,” said Nicholas Spiro of Spiro Sovereign Strategy.

“The lira was falling sharply against the dollar before the election. It could now plummet, fuelling inflationary pressures further and heaping pressure on the central bank to raise interest rates.”

Already one of the worst performing emerging market currencies this year, the lira initially weakened as far as 2.799 to the dollar in thin trade after the results, an almost 5 percent slide.

By 2040 GMT, it was at 2.759 to the dollar, still considerably weaker than Friday’s close of 2.6615.

“ERDOGAN MAY DOUBLE DOWN”

A senior AKP official told Reuters on condition of anonymity that the party now expected to form a minority government, and to contest an early election at some point.

While investors were hoping for an outcome that ensured stability, most hoped there would be no landslide for the AKP, because it could have led to a constitutional change and handed more power to President Tayyip Erdogan, increasingly seen by critics as an authoritarian figure.

Some analysts said Sunday’s setback could inflame Erdogan’s authoritarian tendencies.

“Erdogan is unlikely to alter his overall stance, governing style and policy agenda,” said Wolfango Piccoli of Teneo Intelligence.

“The risk is that he may double down, feeling under pressure. Erdogan’s authoritarian brand of politics will remain polarising, and tensions within the country will continue to run high as long as he is in office.”

Erdogan has railed against high interest rates, increasing concern about political meddling in monetary policy and putting pressure on the lira. The currency is down more than 15 percent this year, according to Thomson Reuters data; only the Ukrainian hryvnia and the Brazilian real have fallen more.

Some investors welcomed the result, however.

“Turkey’s voters have decided to form a parliament with four parties,” said Guler Sabanci, chairwoman of Sabanci Holding , one of Turkey’s best known conglomerates.

“This is an important step for democracy, taken in the direction of peace and reconciliation.” (Additional reporting by Nevzat Devranoglu, Ece Toksabay and Dasha Afanasieva; Editing by Mark Trevelyan and Kevin Liffey)

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